Carson Block: Giving up on China--Gov't Protects Frauds

Carson Block, founder of Muddy Waters Research, spoke with Bloomberg Television's
Stephanie Ruhle and Tom Keene on "Market Makers" today about his report on
Olam International and said that he's lost interest in betting against Chinese
stocks.

Block, who compared Olam to Enron, said, "China has gotten harder in the sense
that the government has really taken the side of the frauds. The government
is working with a number of these companies to try to conceal records that
are public. When you are up against that sort of strength of the ability to
revise history, it becomes very difficult."

Courtesy of Bloomberg Television

Block on whether there are less opportunities in China right now:

"China has gotten harder in the sense that as we have communicated a little
bit with the media in the past, the government has really taken the side of
the frauds. The government is working with a number of these companies to try
to conceal records that are public. In some cases, we think revise them. When
you are up against that sort of strength of the ability to revise history,
it becomes very difficult. That is one of the reasons we're not that interested
in China anymore."

On his allegations against Olam:

"Olam has morphed its business from just being a standard ag commodity trader
into investing upstream and production assets as well as midstream and downstream,
so that's processing and distribution. The problem is, it has been burning
cash the entire time it has been public almost. It has not been free cash flow
positive since fiscal 2006. What the company tells investors is that these
investments that it's making in these upstream, midstream, downstream assets,
there is a gestation period and that these will have high ROIs. We looked very
closely at a number of capital projects that the company has embarked on and
we found that many of them are performing very poorly. The company has seemed
to mislead investors about the state in which the number of these projects
are in."

On whether Olam's problems are due to a bad business plan or bad accounting:

"It is certainly at least both. Business planning and business execution is
generally very poor with Olam. On the accounting side, and this company has
an amazing track record with accounting, between fiscal 2006 and 2010, a tremendous
number of revisions in its accounting statements between its Q4 annual statements
and the audited statements. It is important to note that in Singapore companies
publish Q4 statements. Even subsequent to 2010, when you move into 2011, it
has had some issues. We look at these accounts and we think, at best, the accounting
departments or accounting functions are incompetent."

On comparing Olam to Enron:

"The comparison to Enron, let's be clear. Enron stands for a lot of things.
Maybe you could say that Enron in a lot of ways failed because it was legal
fraud. In other words, not so much the criminal actions with the off balance
sheet debt, but the way that they used accounting gimmicks that were legal
to book future income in the present. The problem with doing that, which Olam
makes ample use of that as well--in fact, the noncash accounting games that
it has taken over the past three fiscal years, equate to about 40% of reported
net income over that time. The problem is, if you buy an asset today and to
build a model and then book all of the estimated future income today, next
year when you go to report, you will have a bad comparison and what might you
do? You might go out and buy another asset for the sake of buying another asset."

On whether he's heard from Olam's major shareholders:

"So far I've not had any notes. Our business model is speaking truth to power.
There is a lot of power here. It is a little bit scary to be looking at a sovereign
and saying you have made a sizable investment in a company that is not actually
what it seems to be. We're happy to have a dialogue with Temasek, Cap Guardian,
major shareholders. But so far, we have not."

On whether investors didn't do their homework:

"I would not say that. It is extremely difficult to look at this company.
It operates in 65 countries. Our business model enables us to focus on a company
for months at a time, to do nothing but look at the company. The amount of
time and resources we have devoted to looking at Olam is something you cannot
expect an investor with a diversified portfolio to do."

On whether he's worried about liability issues:

"We prepare every report as though we are going to litigate it and as though
we are going to speak with regulators about the report. I am not trying to
sound overly confident, but we anticipate that. If we have to defend it in
court and then we will defend it in court. It is the nature of the game."

On when the report on Olam was released to hedge fund clients:

"It gets reported. There is a lot of speculation that we have hedge fund clients.
The money that is involved in these trades belongs to people who researched
the names. We don't call around and sell these reports. Everybody is involved
in the research."

On why he advocates short selling:

"There are several important reasons why short selling is good. We are really
one of the most important checks in the marketplace on bad companies, especially
those that are misleading investors or outright committing fraud. We have economic
incentive to investigate what it is that they are doing, especially when you
have companies that are perpetually raising capital from the market and doing
so in ways where investors don't understand the true state of these companies,
you need short sellers to point these out. You can look at Enron. Jim Chanos
was very involved there. That's a big part of why the story got out."

On whether his relationship with Michael Steinhardt and whether Muddy Waters
will start looking like a hedge fund:

"I need to clarify that. I met Mr. Steinhardt a few months ago--first time
I ever met him. It was a big thrill to meet somebody like that. It was a very
interesting conversation. He talked with me about how difficult short selling
is. You can be right, but still lose money. Might we look more like a hedge
fund? I think in a way we are a group of people who pool their capital generally.
We kind of operate in a sense like a private fund. In terms of taking outside
capital, we have no plans for it. Every now and then we discuss that possibility,
but to be honest, I do not think we can continue communicating with the market
our short ideas the way we do now if we took outside capital."